Fund managers increasingly pessimistic on growth

Survey shows more managers believe global economy is in recession

SarahTurner

LONDON (MarketWatch) - Pessimism about prospects for the global economy rose sharply in October, according to Merrill Lynch's monthly fund-manager survey.

The number of managers stating that they believe the global economy is already in recession jumped to 69% in October, the survey showed, up from 44% in September.

As well, a net 60% of managers believe that the global economy will weaken over the next 12 months, up from 37% in September.

Corporate profits are expected to weaken over the same time frame, 74% of managers said, up from a reading of 68% a month ago. A net 87% of managers say corporate operating margins will shrink, up from 79% taking this view last month.

The survey for October is one of the most pessimistic ever, in a month when fund managers lost faith in global growth, commodities, China's economy and emerging markets.

Nervousness grew against a backdrop of dramatic political and financial events.

In the past few weeks, governments around the world acted to shore up the financial system, while central banks instigated a coordinated interest rate cut last week.

A net 59% of managers said that they believe monetary policy is still too restrictive. This compares with 29% holding this view in September.

Meanwhile, 72% of managers say that short-term interest rates will be lower in 12 months time, compared with a reading of 51% a month ago.

Cash positions up

Markets have been on a wild ride over the past few weeks as hope that the plans to bail out banks vied with fear over how the global economy will hold up.

More managers moved into cash in October, the survey showed, with average cash balances rising to 5.3% from 4.8% a month ago.

The number of managers that are overweight cash increased to 49%, from 36% in September.

A net 43% took the stance that global equity markets are undervalued, up from 15% a month ago. The latest figure is a 10-year high.

"Fund managers are waiting for the triggers that will give them the confidence to buy," said Gary Baker, head of EMEA equity strategy at Merrill Lynch.

"What they are looking for is a loosening of monetary conditions and for third-quarter earnings to clarify where problems and opportunities lie across equity markets," he said.

Over the month, mangers lifted their overweight on cash to 56%, from 40%, and raised their overweight on bonds to 17%, from 4%. They were more negative on equities, going from a 37% net underweight to a 45% net underweight.

Regional detail

Managers' overweight on U.S. equities fell to a net 18% in September, from a net 26% a month ago.

Underweight positions on eurozone equities increased to a net 41%, from a net 36% in September, while underweight positions on Japanese equities decreased to a net 9%, from a net 23% a month ago.

The outlook for corporate profits is most favorable in the U.S., a net 29% of managers believe, compared with 34% taking this view a month ago.

Managers became more positive on the prospects for Japanese corporate profits, with a net 7% stating that the country has the most favorable outlook for profit growth, up from 2% a month ago.

The euro zone is still the region with the least favorable outlook for corporate profits, a net 30% of managers believe. This is unchanged from last month.

"Europe has now assumed the U.K.'s mantel as the world's least popular destination for equity investment," said Karen Olney, lead European equities strategist at Merrill Lynch.

"Against this backdrop of fear over profits and recession, investors are selling expensive, highly cyclical industrials and opting instead for stable dividends and capital preservation," said Olney.

A total of 172 asset allocators managing a total of $531 billion in funds participated in the survey.

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